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While the OFFICE of President remains in highest regard at NewEnergyNews, this administration's position on climate change makes it impossible to regard THIS president with respect. Below is the NewEnergyNews theme song until 2020.

Berkeley Lab published a report in 2016 that discussed two approaches to performance-based regulation (PBR) of electric utilities: multiyear rate plans (MRPs) and performance incentive mechanisms (PIMs).1 The authors described these approaches at a high level and in the context of growing levels of demandside management (DSM), distributed generation and other distributed energy resources (DERs).

This report presents a more in-depth analysis of the multiyear rate plan approach to PBR for electric utilities, applicable to both vertically integrated and restructured states. The report is aimed primarily at state utility regulators and stakeholders in the state regulatory process. The approach also provides ideas on how to streamline oversight of public power utilities and rural electric cooperatives by their governing boards.

We discuss the rationale for MRPs and their usefulness under modern business conditions. We then explain critical plan design issues and challenges and present results from numerical research that considers the extra incentive power achieved by MRPs with different plan provisions. Next, the report presents several case studies of utilities that have operated under formal MRPs or, for various reasons, have stayed out of rate cases for more than a decade. In these studies we consider the effect of MRPs and rate case frequency on utility cost, reliability and other performance dimensions. Appendices present further information on MRP plan design and some details of the technical work.

MRPs are a comprehensive approach to PBR designed to strengthen general incentives for good utility performance. Two key provisions of MRPs strengthen cost containment incentives and streamline regulation:

1. A rate case moratorium reduces the frequency of rate cases, typically to once every four or five years.

2. An attrition relief mechanism (ARM) escalates rates or revenue between rate cases to address cost pressures such as inflation and growth in number of customers independently of the utility’s own cost.

Loosening the link between its own cost and revenue gives a utility an operating environment more like that which competitive markets experience.

Most MRPs feature a performance metric system that includes some PIMs. These PIMs provide awards or penalties, or both, for performance in targeted areas. PIMs are most commonly used in MRPs to strengthen incentives for utilities to maintain or improve reliability and customer service quality. Some plans also include earnings sharing mechanisms, efficiency carryover mechanisms and marketing flexibility.

Provisions are often added to plans to strengthen utility incentives for DSM. For example, utility expenditures on DSM programs are usually tracked, and PIMs can be added to reward utilities for successful DSM programs. Revenue decoupling can mitigate a utility’s incentive to boost retail sales and reduce risks of revenue losses from rate designs that encourage DSM.

How Prevalent Is This Approach?

MRPs were first widely used in the United States in the 1980s to regulate railroads and telecommunications carriers, industries beset by rising competition. Early adopters of MRPs in the U.S. electric utility industry included California and several northeastern states. Use of MRPs has recently grown among vertically integrated electric utilities in diverse states that include Arizona, Georgia and Washington. Greater use of MRPs for power distributors has been slowed by their requests for accelerated system modernization, which complicate plan design. MRPs are much more common for electric utilities in Canada and countries overseas. The impetus for adopting MRPs in these countries has often come from policymakers rather than utilities.

America’s investor-owned electric utility industry was largely built under cost of service regulation (COSR). This regulatory system traditionally adjusted rates that compensate utilities for costs of capital, labor and materials only in general rate cases. The scope of costs eligible for tracker treatment, which expedites cost recovery, has gradually enlarged and sometimes includes capital costs as well as energy expenditures.

The efficacy of COSR varies with external business conditions. When conditions favor utilities (e.g., are conducive to realizing at least the target rate of return), rate cases are infrequent. Performance incentives are then strong and the cost of regulation is quite reasonable. When conditions are less favorable, rate cases are more frequent and more costs are tracked. Performance incentives can then be weak and regulatory cost can be high. These attributes of COSR are worrisome because business conditions today are often less favorable to utilities than in the past.

MRPs are a different approach to regulation that is especially appealing when the alternative is frequent rate cases or expansive cost trackers. The regulatory process is streamlined and better utility performance can be encouraged due to stronger performance incentives and increased operating flexibility. Benefits of better performance can be shared with customers. Recent advances in MRPs such as efficiency carryover mechanisms and statistical benchmarking can “turbocharge” their incentive power and ensure benefits for customers.

What Are Some Disadvantages of MRPs?

MRPs are complex, and their adoption can involve extensive change to the regulatory system. It can be challenging to design plans that strengthen incentives without undue risk and share benefits fairly between utilities and their customers. Some kinds of business conditions (e.g., brisk inflation and declining average use) have proven easier to address using MRPs than others (e.g., capital spending surges). MRPs can invite strategic behavior and controversies over plan design.

This report discusses six case studies of utilities operating under MRPs:

1. Central Maine Power operated under a sequence of MRPs from 1996 to 2013. The plans afforded the company unusual marketing flexibility which it used to develop special contracts with large-volume customers. These contracts helped the company retain their contributions to fixed costs of the system, for the benefit of all customers.

2. California has the nation’s longest history with MRPs for retail services of electric utilities. The Public Utilities Commission has limited rate case frequency and staggered plan terms to avoid simultaneous rate cases. Plan provisions have provided strong incentives for utilities to embrace DSM.

3. New York has regulated electric utilities using MRPs since the 1990s. The state’s Reforming the Energy Vision proceeding has considered how rate plans should evolve to regulate the “utility of the future.”

4. MidAmerican Energy operated under a rate freeze in Iowa from 1997 to 2013. This freeze extended to charges for energy procured as well as for capital, labor and materials.

5. Ontario, Canada, has used MRPs to regulate the dozens of power distributors since the late 1990s. Capital spending surges have posed special plan design challenges. Innovations in Ontario regulation also include incentive-compatible menus and extensive use of benchmarking.

6. Great Britain also has a long history with MRP regulation. The current “RIIO” approach to regulation of energy utilities there has attracted the attention of many North American regulators.

This report also addresses the impact of MRPs (and, more generally, rate case frequency) on utility cost performance using two analytical tools: incentive power analysis and empirical research on utility productivity trends. An Incentive Power Model uses numerical analysis to assess the incentive impact of alternative stylized regulatory systems. For North American case studies, we compared productivity trends of utilities operating under MRPs to U.S. norms. We also considered productivity trends of utilities that operated under unusually frequent and infrequent rate cases.

Both lines of research suggest that the frequency of rate cases can materially affect utility cost performance. For example, the multifactor productivity (MFP) growth of the electric, gas and sanitary sector of the U.S. economy was materially slower than that of the economy as a whole from 1974 to 1985, when rate cases were frequent due in part to adverse business conditions, than in the early postwar period, when favorable business conditions encouraged less frequent rate cases. We also found that the MFP growth of utilities that operated for many years without rate cases, due to MRPs or other circumstances, was significantly more rapid than the full sample norm. Cumulative cost savings of 3 percent to 10 percent after 10 years appear achievable under MRPs.

Conclusions

The case studies and incentive power and productivity research presented in this report have important implications. First, utility performance and regulatory cost should be on the radar screen of U.S. regulators, consumer groups and utility managers. Our research shows that key business conditions facing utilities today are less favorable than in the decades before 1973 when COSR worked well and was becoming a tradition. Today’s conditions encourage more frequent rate cases and more expansive cost trackers. MRPs can produce material improvements in utility performance which can slow growth in customer bills and bolster utility earnings.

Notwithstanding the potential benefits of MRPs, they are still not used in most American states. COSR is well established and there are many accomplished practitioners. It can be difficult to design MRPs that generate strong utility performance incentives without undue risk, and that share benefits of better performance fairly with customers. MRPs invite strategic behavior and controversies over plan design. Continuing innovation of COSR will occur, and this will slow diffusion of MRPs.

However, MRPs are also evolving and remedies to problems encountered in early plans have been developed. MRPs are well suited for addressing conditions expected in coming years, such as rising input price inflation and DER penetration and increased need for marketing flexibility. For these and other reasons, we foresee expanded use of MRPs in U.S. electric utility regulation in coming years.

Review of OIL IN THEIR BLOOD, The American Decades by Mark S. Friedman

OIL IN THEIR BLOOD, The American Decades, the second volume of Herman K. Trabish’s retelling of oil’s history in fiction, picks up where the first book in the series, OIL IN THEIR BLOOD, The Story of Our Addiction, left off. The new book is an engrossing, informative and entertaining tale of the Roaring 20s, World War II and the Cold War. You don’t have to know anything about the first historical fiction’s adventures set between the Civil War, when oil became a major commodity, and World War I, when it became a vital commodity, to enjoy this new chronicle of the U.S. emergence as a world superpower and a world oil power.

As the new book opens, Lefash, a minor character in the first book, witnesses the role Big Oil played in designing the post-Great War world at the Paris Peace Conference of 1919. Unjustly implicated in a murder perpetrated by Big Oil agents, LeFash takes the name Livingstone and flees to the U.S. to clear himself. Livingstone’s quest leads him through Babe Ruth’s New York City and Al Capone’s Chicago into oil boom Oklahoma. Stymied by oil and circumstance, Livingstone marries, has a son and eventually, surprisingly, resolves his grievances with the murderer and with oil.

In the new novel’s second episode the oil-and-auto-industry dynasty from the first book re-emerges in the charismatic person of Victoria Wade Bridger, “the woman everybody loved.” Victoria meets Saudi dynasty founder Ibn Saud, spies for the State Department in the Vichy embassy in Washington, D.C., and – for profound and moving personal reasons – accepts a mission into the heart of Nazi-occupied Eastern Europe. Underlying all Victoria’s travels is the struggle between the allies and axis for control of the crucial oil resources that drove World War II.

As the Cold War begins, the novel’s third episode recounts the historic 1951 moment when Britain’s MI-6 handed off its operations in Iran to the CIA, marking the end to Britain’s dark manipulations and the beginning of the same work by the CIA. But in Trabish’s telling, the covert overthrow of Mossadeq in favor of the ill-fated Shah becomes a compelling romance and a melodramatic homage to the iconic “Casablanca” of Bogart and Bergman.

Monty Livingstone, veteran of an oil field youth, European WWII combat and a star-crossed post-war Berlin affair with a Russian female soldier, comes to 1951 Iran working for a U.S. oil company. He re-encounters his lost Russian love, now a Soviet agent helping prop up Mossadeq and extend Mother Russia’s Iranian oil ambitions. The reunited lovers are caught in a web of political, religious and Cold War forces until oil and power merge to restore the Shah to his future fate. The romance ends satisfyingly, America and the Soviet Union are the only forces left on the world stage and ambiguity is resolved with the answer so many of Trabish’s characters ultimately turn to: Oil.

Commenting on a recent National Petroleum Council report calling for government subsidies of the fossil fuels industries, a distinguished scholar said, “It appears that the whole report buys these dubious arguments that the consumer of energy is somehow stupid about energy…” Trabish’s great and important accomplishment is that you cannot read his emotionally engaging and informative tall tales and remain that stupid energy consumer. With our world rushing headlong toward Peak Oil and epic climate change, the OIL IN THEIR BLOOD series is a timely service as well as a consummate literary performance.

Review of OIL IN THEIR BLOOD, The Story of Our Addiction by Mark S. Friedman

"...ours is a culture of energy illiterates." (Paul Roberts, THE END OF OIL)

OIL IN THEIR BLOOD, a superb new historical fiction by Herman K. Trabish, addresses our energy illiteracy by putting the development of our addiction into a story about real people, giving readers a chance to think about how our addiction happened. Trabish's style is fine, straightforward storytelling and he tells his stories through his characters.

The book is the answer an oil family's matriarch gives to an interviewer who asks her to pass judgment on the industry. Like history itself, it is easier to tell stories about the oil industry than to judge it. She and Trabish let readers come to their own conclusions.

She begins by telling the story of her parents in post-Civil War western Pennsylvania, when oil became big business. This part of the story is like a John Ford western and its characters are classic American melodramatic heroes, heroines and villains.

In Part II, the matriarch tells the tragic story of the second generation and reveals how she came to be part of the tales. We see oil become an international commodity, traded on Wall Street and sought from London to Baku to Mesopotamia to Borneo. A baseball subplot compares the growth of the oil business to the growth of baseball, a fascinating reflection of our current president's personal career.

There is an unforgettable image near the center of the story: International oil entrepreneurs talk on a Baku street. This is Trabish at his best, portraying good men doing bad and bad men doing good, all laying plans for wealth and power in the muddy, oily alley of a tiny ancient town in the middle of everywhere. Because Part I was about triumphant American heroes, the tragedy here is entirely unexpected, despite Trabish's repeated allusions to other stories (Casey At The Bat, Hamlet) that do not end well.

In the final section, World War I looms. Baseball takes a back seat to early auto racing and oil-fueled modernity explodes. Love struggles with lust. A cavalry troop collides with an army truck. Here, Trabish has more than tragedy in mind. His lonely, confused young protagonist moves through the horrible destruction of the Romanian oilfields only to suffer worse and worse horrors, until--unexpectedly--he finds something, something a reviewer cannot reveal. Finally, the question of oil must be settled, so the oil industry comes back into the story in a way that is beyond good and bad, beyond melodrama and tragedy.

Along the way, Trabish gives readers a greater awareness of oil and how we became addicted to it. Awareness, Paul Roberts said in THE END OF OIL, "...may be the first tentative step toward building a more sustainable energy economy. Or it may simply mean that when our energy system does begin to fail, and we begin to lose everything that energy once supplied, we won't be so surprised."

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